This time, imagine you are a recent BCom graduate and have started working for PureMeat Company, a
Question:
This time, imagine you are a recent BCom graduate and have started working for PureMeat Company, a small but successful meat processing business that delivers premium cuts fresh, packaged and frozen to all supermarket chains across both the South and North Islands of New Zealand. PureMeat is currently in the process of evaluating whether to expand its business into Asian countries. The most recent balance sheet at fiscal year end 2021 is as follows:
PureMeat Corporation
Balance Sheet
as at 30 April 2021
Assets | $000 | Liabilities & Equity | $000 | |
Cash | 75 | Accounts Payable | 672 | |
Accounts Receivable | 855 | Accrued Marketing Expense | 9 | |
Inventory | 650 | Accrued G&A Expense | 18 | |
Total Current Assets | 1,580 | Total Current Debt | 699 | |
Fixed Assets | 1,957 | Long Term Debt | 700 | |
Accumulated Depreciation | (795) | Share capital | 950 | |
Net Fixed Assets | 1,162 | Retained Earnings | 393 | |
Total Assets | 2,742 | Total Debt and Equity | 2,742 |
The company has 550,000 shares outstanding, which are selling for $3.98 per share.
Its debt is selling at book value with a yield to maturity of 8.8%.
From available market data you estimate the return on the market and inflation to be 9.5% and 1.5% respectively.
The company's beta is 1.45 and the company tax rate in New Zealand is 28%.
a. Calculate the company’s cost of debt before and after taking the tax deductibility of interest payments into account. (3 marks)
b. Calculate the cost of equity. (3 marks)
c. Calculate the weighted average cost of capital. (7 marks)
d. Based on a rough estimate of the project's free cash flows that management provided, you calculate a large internal rate of return of 27.5%. Despite your concerns that the management might be a little too optimistic with their forecasts, would you recommend pursuing the international expansion into Asia? (2 marks)
Expert Answer:
a Answer Cost of Debt Conceptually the cost of a debt instrument is the yield to maturity of that instrument Pretax Cost of Debt 88 Posttax Cost of Debt Pretax Cost of Debt 1Tax Rate Here Tax Rate 28 ... View the full answer
